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Report On Bangladesh Bank
Report On Bangladesh Bank
Report On Bangladesh Bank
The Bangladesh Bank performs the traditional central banking roles of note issue and banker to
the government and banks. It formulates and implements monetary policy, manages foreign
exchange reserves and supervises banks and non-bank financial institutions. Its prudential
regulation includes minimum capital requirements, limits on loan concentration and insider
borrowing and guidelines for asset classification and income recognition. BB has power to impose
penalties for non-compliance and also intervenes in management of a bank if serious problems
arise. It also provides deposit insurance to small depositors.
The Headquarter of the bank is located in Dhaka with branches in Chittagong, Rajshahi, Khulna,
Sylhet, Barisal, Bogra, Rangpur, and Sadarghat in Dhaka.
Monetary Policy
Until 1990, BB pursued a monetary policy with conflicting. Objectives of (a) controlling overall
monetary expansion and (b) ensuring an adequate flow of credit to priority sector. The first
objective had been pursued primarily through the imposition of credit ceilings and maintenance of
reserve and liquid asset requirement. To achieve the second objective, administered interest rates
in combination with large refinance programme and other direct interventions were used. The
inherent conflict between the two objectives surfaced during 1980s when credit to the priority
sectors expanded in excess of overall monetary considerations. The high levels of loosely managed
lending to priority sector became a burden for banks and a limiting factor for monetary policy.
It has been recognized that that system of credit ceilings renouncing (at concessionary rates) of
loans to priority sectors and administered interest rate structure have been inimical to resource
mobilization and efficient credit allocation. The allocation of credit has been largely determined
by administrative fiat, rather than by demand and interest rates and has not reflected cost, risk and
efficiency of intermediation. Administered interest rates and rigid monetary policies have created
a non-competitive environment which has discouraged efficiency and service oriented banking.
To improve the efficiency of monetary management BB has made considerable progress since,
1990 in moving away from previous system of direct control to a gradual transition toward more
flexible and discerning methods of monetary management and control which entails essentially
reliance on reserve and liquid assets requirements flexible interest rates and open market
interventions. Credit ceilings have been eliminated and preferential refinancing facilities for
priority sectors have been replaced by single rediscount window facility at Bank Rate. In order to
effectively use open market operations (OMO) for control of liquidity BB has been legally
authorized to issue its own securities.
Under the administered interest rate regime, Government clearly attempted to provide positive
incentive to savers and at the same time attempted to keep lending rates low in order to keep
investment costs low. An important effect of this potentially conflicting policy objective had been
to squeeze commercial banks margin and reduce their incentive to mobilize deposits. This had also
a number of other unfortunate repercussions.
In view of the disadvantages of administered interest rate policy, BB moved to market oriented
approach to interest rate determination with deposit rates that better reflect market forces and
lending rates that better reflect costs of funds and intermediation costs and risk. Under the new
interest rate policy which became effective in January, 1991. all deposits rates have been
decontrolled except for DPS and some special rates for short term deposits; floors are maintained
for savings and fixed deposits. Lending rates are all freely determined by the market except for
agriculture, small industry and exports.
Changes in interest rate policy have effectively reduced the extent of direct control of interest rate
by BB/Govt. This has resulted greater flexibility and more responsive rate setting. However, the
structure of the banking industry is such that there is insufficient competition. The pricing policy
followed by NCBs seem to be determined by attempts to recover past losses. This cannot be
considered profit-maximizing behavior. The past losses are a sunk cost and should not influence
current loan pricing. Private Banks price loans following the NCBs who act as price leaders.